When a specialist is caught in the middle of a trade between informed and uniformed traders, which effectively eliminates the spread or causes a loss, is subject to:

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When a specialist is caught in the middle of a trade between informed and uniformed traders, it leads to adverse selection, as the uninformed traders are likely to suffer a loss due to the information asymmetry. This phenomenon can occur in any market where one participant has better information than the other. Market impact costs refer to the cost of executing a large order in the market, broker's quotation bias refers to a situation where brokers provide quotes that are not reflective of the current market conditions, and increasing the number of uninformed traders does not necessarily address the issue of information asymmetry.

When a Specialist Is Caught in the Middle of a Trade